India's industrial output growth in April was next to nothing with the official index of industrial production (IIP) rising a mere 0.1 per cent in the month over the year ago period, much below analysts’ expectations, raising hopes for further loosening of monetary policy next week.

Stock market indices rallied despite almost flat industrial activity in the first month of the current financial year, with the 30-stock benchmark Sensex rising 1.17 per cent to close at 16,862, the highest level in more than a month. This came a day after rating agency S&P warned India could be the first among BRIC markets to lose investment grade mark.

Market analysts say a poor industrial growth scenario has already been discounted in current market valuations and investors are looking at the extent of cut in policy rates as the next trigger, besides other macro factors.

“Looking at the latest trend, we think that IP(industrial production) growth will remain weak in the next few months as well, in the 2-3 per cent range, which will likely result in a sub-6 per cent headline GDP growth through April-June,” according to a research note by Deutsche Bank.

It added that the latest IIP data does not change any of its core forecasts or views either on industrial sector or headline real GDP growth.

The Reserve Bank of India (RBI), the Indian central bank, is widely expected to announce a second cut in policy rates to assuage markets over the slowing economy on June 18. Two months ago, the RBI had surprised the markets by cutting policy rates by 50 basis points (bps) against consensus estimates of 25 bps.

Another factor that could be playing in the mind of investors is statistically brighter picture portrayed by the IIP data after a decline in the index in March (-3.5 per cent) over the same month last year. But at 0.1 per cent, it is not much to cheer about, especially with key indicators within the IIP continuing to be under pressure.

One such indicator which portends a poor scenario in the coming months is decline in capital goods index. The barometer of production of machinery used by manufacturing sector declined 16.3 per cent. Although this is better than 21.3 per cent decline in March, a double digit decline in capital goods index means manufacturing sector is not up for strong revival anytime soon.

However, one clear positive factor in the latest numbers relate to growth in consumer goods space. The consumer goods basket in the IIP, which is dominated by food and automobiles in terms of weightage, grew 5.2 per cent in April over the year ago period, as against 0.7 per cent in March 2012. This shows that despite the stress of inflation and overall poor sentiment, the consumer goods sector is not feeling a major shrinkage and producers are expecting better demand going forward.

This could be partly linked to loosening monetary policy, with probable rate cuts boosting demand in interest rate sensitive sectors like automobiles in the coming months. Companies may also be factoring in an easing in crude oil prices, which would bring down the cost of maintaining an automobile.

While mining sector reported a 3.1 per cent decline in April, manufacturing as a part of the broader index grew just 0.1 per cent, while electricity sector index grew 4.6 per cent.

In terms of industries, 12 out of the 22 industry groups in the manufacturing sector have shown positive growth during April, compared to the corresponding month of the previous year.

This was led by ‘Publishing, Printing and Reproduction of Recorded Media’ which grew 52.7 per cent in April followed by 29.4 per cent growth in ‘Medical, precision & optical instruments, watches and clocks’ and 21.4 growth in ‘Radio, TV and Communication Equipment and Apparatus’.

On the other hand, the industry group ‘Electric Machinery and apparatus’ has clocked a negative growth of 49.2 per cent followed by 14.9 per cent in ‘Office, Accounting and Computing Machinery’ and 9.1 decline in ‘Wearing apparel; dressing and dyeing of fur’.